“There is no need to think of quitting China,” fabric exporter Raymond Xie was finally able to tell his clients earlier this month. Like other veteran Chinese exporters, Xie’s “heart was torn with anxiety” after his factory operations at the start of the year were hit by coronavirus-induced supply chain disruptions. “At one point, my factory was unable to operate for almost a month, let alone ship on schedule. My foreign customers also kept checking with me how much the lockdown measures would impact China’s supply chain and how long it would last,” said Xie. “I was also worried that enormous orders from various industries might quickly leave China as a result.” The tax rebates and other subsidies are enough to cover my recent losses. I can now promise my clients we are still the best cost-effective supplier Raymond Xie But Xie and his fellow exporters were finally able to breathe a sigh of relief when Beijing announced a series of tax relief plans earlier this month. Xie was refunded nearly 90 per cent of the taxes he had paid in the first quarter of the year, which for him meant around 360,000 yuan (US$55,000) found its way back into his bank account. “The roads to the ports nearby that had been blocked for nearly a month started to reopen on the same day I received the refund,” he added. “The tax rebates and other subsidies are enough to cover my recent losses. I can now promise my clients we are still the best cost-effective supplier.” Manufacturers have been growing increasingly uncertain amid the ongoing supply and production chain instability caused by virus-induced lockdowns, including in Shanghai which impacted operations at the nearby Port of Ningbo-Zhoushan. Supply chain diversification away from China has been “popular” over the past five years, but new variables are constantly changing the rhythm of the process, according to Shenzhen-based supply-chain specialist Liu Kaiming. Washington and some other Western countries have long been pushing for so-called decoupling from China over fears of an over-reliance on the world’s second largest economy, but it has equally proved impractical for most given its integral position in global supply chains. “The biggest driver in 2018 was the [US-China] trade war, meaning the biggest stress was from the US – the world’s largest market – while during the past three years, the pandemic just made the world’s production more dependent on China than ever,” said Liu, who is the founder of the Institute of Contemporary Observation. The organisation partners with global brands and other institutes to supervise working conditions and product quality at hundreds of Chinese factories. Was the US-China phase-one trade deal a ‘historic failure’, and what’s next? The Ukraine war may provide the latest driver, which may affect China-Europe relations, which have so far remained much more moderate and stable than China-US relations, according to Liu. “New and growing risks that are difficult to assess do trigger brand giants to reconsider their investment in China, such as if the country will move into a more active pro-Russian stance and any possible conflicts in the Taiwan Strait in the coming years,” he added. A senior executive at an original equipment manufacturer that has factories in China, India and Vietnam producing products for various international brands said the current risk for China is that it has been “put in a position to be compared constantly in terms of labour cost, stability and logistics”. “It is crucial that the current draconian Covid policies in China cannot be normalised,” said the executive who declined to give her name or the name of her company due to the sensitivity of the issue. The current strict epidemic prevention policy will make [Beijing] lose points in the future Senior executive at original equipment manufacturer “The current strict epidemic prevention policy will make [Beijing] lose points in the future,” she added, pointing out how China’s governance model has traditionally been a plus for maintaining supply chains, with its attitude towards foreign investment traditionally stable. Liu, though, said that China’s supply chain problems in March and April will lead to further price inflation for goods in Europe and the United States. This factor makes it “not necessarily good timing” to enhance supply chains in new locations or increase factories, suppliers and sources of raw materials. “Even brand giants are generally reluctant to switch suppliers unless they have to,” Liu added. Echoing Chinese manufacturers and exporters, American businesses that have operations in China have also said that relocating is easier said than done. China’s ‘supply chain security, competitiveness’ under threat “There’s a probability weighting to consider. The US faced significant disruption earlier in the pandemic, followed by the significant Covid response and its disruptions in China. Really a combination of unprecedented events,” said Jonathan Garrison, founder of Beijing-based trade, logistics and merchant services company Enroute Global. “We also can’t ignore the network effect of the supply chain participants and contractual obligations in China that raise the cost of decoupling from that market. “A move away from China means unwinding any incentives you’ve enjoyed. The infrastructure is in China, the investment. It’s not like displeasure about certain issues in China suddenly makes Honduras a viable option.” Shifting supply chains also raises questions over regulatory structures, customs requirements, the availability of other suppliers and logistics outside China, according to Mitchell Thomson, founder of California-based firm Ss Brewtech, who has interests in brewing, flight simulators and car electronics. Bigger companies with some infrastructure outside China are reallocating and rebalancing their operations. Not relocation Mitchell Thomson He explained that some garment and fashion manufacturers may already have the mechanisms in Southeast Asia to scale up productions with a simple supply chain. “But if it starts from zero, how can you do it?” he said, adding that it has become even harder to make changes over the past two years because staff have not wanted to travel abroad to help open a new factory due to strict quarantine measures. “It sounds like a slogan. How can you practically do that? Bigger companies with some infrastructure outside China are reallocating and rebalancing their operations. Not relocation.” Zaheer Faruqi, CEO at Atlanta-based Aventure Aviation that supplies aircraft parts to commercial and military companies, started “spreading the risks” after the global financial crisis in 2008 instead of only focusing on the US. Faruqi sources brakes in South Korea and then sells them to a different country, like Indonesia or companies in Britain, but crucially he does not own factories outside the US, which gives him the flexibility to move around the various markets. “What we do now is go to where the opportunities are. We diversify products and services and locations. It’s just like Walmart with different product lines,” he said, adding that his company’s revenue is 30 per cent higher than last year. Douglas Kent, executive vice-president at the Chicago-based Association for Supply Chain Management and a veteran strategic adviser for companies, said that the motivation pushing companies “to be more creative” when maintaining profitability is becoming difficult. “Customers are feeling the impact of the costs passing through with exploding inflation rates, as shipping costs between the US and China have surged 10 times,” he said. “When companies [are] ensuring customers get their goods and improve revenues, they’ll build the capability to conduct [supply chain] optimisation.” It’s a paradigm shift that needs strategic requirements of organisations on an ongoing basis Douglas Kent If manufacturers have their key demands in the US or North America, Mexico is an alternative because it has a similar labour rate to China, easy customs procedures and products can be transported by trucks instead of vessels, he added. “Examples include the electronics sector that mainly serves the US market and the automotive industry that needs low labour costs with heavy products to transport, as well as some clothing business,” Kent explained. “It’s a paradigm shift that needs strategic requirements of organisations on an ongoing basis.” Chinese suppliers are, according to supply-chain specialist Liu, playing a much bigger role than five or 10 years ago. Minnesota-based loudspeaker maker MISCO is exploring the possibility of working with other factories in Southeast Asia because of the 25 per cent import tariff imposed on goods from China by the Trump administration. ‘Serious disruption’: world’s largest container port hit by Covid surge The coronavirus delayed their plans, but moving part of the operations away from China does not mean they have cut ties with the country. “It’s primarily Chinese capital. [Chinese] owners just build factories across the border in Vietnam for an overall lower cost to increase production,” said CEO Dan Digre. “There’s the development of loudspeaker [business] in Vietnam, but a lot of components are coming from China.” The electronics and machinery sector, as well as the footwear sector, are prime examples of industries who have attempted to shift supply chains as they have significant capital and firms have been trying to relocate production to Southeast Asian countries since the start of the trade war. But China’s exports of mechanical and electrical products actually increased to 12.83 trillion yuan (US$1.98 trillion) last year from 9.65 trillion yuan in 2018. Traditional manufacturing like footwear and apparel with the shortest supply chains that can be replaced still lack an efficient production capacity like China Senior executive at original equipment manufacturer And for labour-intensive footwear exports, which that have been shifting out since 2010, China also remained the world’s largest shoemaking country last year with an export value of over US$47.9 billion, compared to US$46.9 billion in 2018. “The main elements considered by brand giants have always been population, labour costs, governance and geopolitical stability, which must match the brands’ global market layout,” said the senior executive at the original equipment manufacturer. Her labour-intensive company has developed production capacities in Vietnam and India, but capacity in China is still around 50 per cent. “Traditional manufacturing like footwear and apparel with the shortest supply chains that can be replaced still lack an efficient production capacity like China,” she added. “Last year, production capacity outside of China fell, so almost all orders counted on China’s plants.”